Fixing Fixed-Investment Incentives

No one can say for sure why business investment has not increased in recent years, even during periods of buoyant economic growth. But, contrary to the conventional wisdom, one can be sure that business leaders' collective fear of economic uncertainty is not the prime culprit.

LONDON – Back in February, I noted that the global economy at the end of 2016 was in a stronger cyclical position than most people had expected, given the political upheavals of the previous 12 months. That upward momentum carried through to the first quarter of 2017. According to the latest “nowcast”-type indicators, world GDP growth is exceeding 4% – perhaps the strongest performance seen since before the 2008 financial crisis.

Still, some observers – and not just chronic pessimists – have countered that the evidence remains anecdotal, and that it is impossible to predict how long the current economic moment will last. Indeed, there have been other periods in the long post-2008 recovery when growth returned, only to peter out quickly and become sluggish again.

To bolster long-term economic growth, business investment will have to increase. Unfortunately, this is easier said than done. In Western economies in particular, non-residential fixed investment is precisely the factor that was missing in previous, short-lived cycles of acceleration.

(Loosely related to the Picketty's work). Assume ECB, BOJ, FED all effectively lend to to tier 1 investment banks $1 trillion at 0.5% pa. Then Tier 1 investment banks hold back 50% of the $1T as cash (or buy their Governments bonds, about the same thing), only to lend the other $ 1/2T to Asia, Eastern Europe, Aussi, Africa (AEAA) by lendinging it to their own domicile corporates at 1% who lend intra group to AEAA, does that mean that the ECB, BOJ, FED are gouging AEAA as to all the 0.5% on 1T and will the gouge ramp up as inflation linked bond/lending rates follow inflation and kill AEAA economies' cap markets. At least could this question get into the media, as hello..... If only 10% of the funds flowed out to AEAA, we wouldn't care but it is much much more. Thanks Picketty.

That was the greatest mistake in the way Bernanke, too arrogant an academic, handled the 2008 crisis. He chose to avoid a brief inferno at the expense of getting an endless roasting.

1907 was handled very differently by JP Morgan. He loaned money at high rates to those he thought would succeed. And he made a fortune. Those who he deemed were not fit for success were bought at pennies on the dollar or simply disappeared. And the economy restarted anew, business as usual.

Our society is becoming so alarmingly hedonistic that it can not tolerate the slightest suffering. What a disgrace. We are creating a society of pure imbeciles.

In today's trading desks, when the SP is down 5 points for more than a hour, traders become anxious and start to worry as if it was the end of the world.

Let the market set interest rates freely.
But be prepared to withstand lower equity prices for more than an hour.

Good article. While O'Neill tippy-toes around the issue of balance sheet inflation relative to income from operations that pervades US business, his recommendation regarding curbs on debt issuance is sound. The only question is how much weight you want to put on that one measure since there are many ways to bring asset prices back in line with income.

When consumer disposable income is under squeeze why should anybody invest. You describe a static environment in the West which has traditionally driven things and than ask why there is a lack of dynamic when it is already identified. The demand for social and health services in the West will maintain tax levels damping response and the aging demographic will deliver higher costs and higher levels of economic inactivity in the population

China is a totally different ball game as industrialisation has occurred with 20% of the population located on the Eastern Coastal strip leaving 80% much of which is still largely rural in the Centre and Western regions. That leaves a lot of scope for their domestic development. Taxation in China is much lower than the West damping down less than in the West. Whilst China has a demographic it has little intention of servicing it in the same way the West is. Further the Chinese have a saving ethic which has been abandoned by the Baby Boomers in the West.

The difference is economic activity or lack of it can be seen as a clash of cultures which are totally different in makeup and operation but operate in the same marketplace. It is obvious which one will struggle in a head to head. The West has a structure built on 20th century affluence which would be very difficult to change whereas China is lifting people out of paddy fields. The relative dynamics are completely different

As a backdrop there is the Wheat culture which is individualist in the West and the Rice culture in the East which is more community and cooperatively driven

Jim, the real money is under lock, 6feet under. As long as there is no real money that is circulating in the real economies, real jobs, real investments and real growth cannot happen. At the moment, there are too many barriers and you mentioned some of them and for the decision makers, these are very convenient barriers, no matter the social costs (thus Brexit, Trump, etc.). The main culprits are not the CEOs' of corporations (these are the cronies), the main culprits are rather (1) the politicians or the elected representatives (2) the central bankers (3) the regulators. Unless a new financial system is devised and agreed upon by the major powers (whatever this might mean today), the western and other economies shall remain in a bottle neck and the three parties that I mentioned shall continue to live in denial and spread nothing but lies.

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PS OnPoint

The Mueller report in America, along with reports of interference in this week’s European Parliament election, has laid bare the lengths to which Russia will go to undermine Western democracies. But whether Westerners have fully awoken to the threat is an open question.

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